UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the period ended September 30, 2001
Commission File Number: 0-16471
First Citizens BancShares, Inc
(Exact name of Registrant as specified in its charter)
Delaware 56-1528994
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
239 Fayetteville Street, Raleigh, North Carolina 27601
(Address of principal executive offices) (zip code)
(919) 716-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No _____
Class A Common Stock--$1 Par Value-- 8,797,154 shares
Class B Common Stock--$1 Par Value-- 1,692,899 shares
(Number of shares outstanding, by class, as of November 13,2001)
<page>
INDEX
PART I. FINANCIAL INFORMATION PAGES
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2001,
December 31, 2000,and September 30, 2000 4
Consolidated Statements of Income for the three-month
and nine-month periods ended September 30, 2001 and
September 30, 2000 5
Consolidated Statements of Changes in Shareholders'
Equity for the nine-month periods ended September 30, 2001,
and September 30, 2000 6
Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 2001, and September 30, 2000 7
Note to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-20
Item 3. Market Risk Disclosure 15
<Page>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. During the quarter ended September 30, 2001,
Registrant filed noCurrent Report on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CITIZENS BANCSHARES, INC.
(Registrant)
Dated: November 13, 2001 By:/s/Kenneth A. Black
Kenneth A. Black
Vice President, Treasurer,
and Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 2001
<Page>
<Table>
<Caption>
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
September 30* December 31# September 30*
(thousands, except share data) 2001 2000 2000
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $691,594 $755,930 $529,897
Overnight investments 625,576 431,382 450,446
Investment securities held to maturity 2,430,718 1,778,166 1,693,741
Investment securities available for sale 51,405 38,554 36,698
Loans 7,109,584 7,109,692 7,097,773
Less reserve for loan losses 105,775 102,655 101,565
- ------------------------------------------------------------------------------------------------------------------------------
Net loans 7,003,809 7,007,037 6,996,208
Premises and equipment 477,218 444,731 427,245
Income earned not collected 64,747 62,580 59,708
Other assets 177,458 173,237 167,353
==============================================================================================================================
Total assets $11,522,525 $10,691,617 $10,361,296
==============================================================================================================================
Liabilities
Deposits:
Noninterest-bearing $1,497,606 $1,373,880 $1,387,406
Interest-bearing 8,147,620 7,597,988 7,281,236
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 9,645,226 8,971,868 8,668,642
Short-term borrowings 676,351 632,372 632,318
Long-term obligations 184,018 154,332 154,687
Other liabilities 150,967 122,317 116,308
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,656,562 9,880,889 9,571,955
Shareholders' Equity
Common stock:
Class A - $1 par value (8,797,154; 8,813,454
and 8,813,454 shares issued, respectively) 8,797 8,813 8,813
Class B - $1 par value (1,693,549; 1,709,382
and 1,720,360 shares issued, respectively) 1,694 1,709 1,720
Surplus 143,766 143,766 143,766
Retained earnings 705,067 650,148 629,543
Accumulated other comprehensive income 6,639 6,292 5,499
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 865,963 810,728 789,341
- ------------------------------------------------------------------------------------------------------------------------------
==============================================================================================================================
Total liabilities and shareholders' equity $11,522,525 $10,691,617 $10,361,296
==============================================================================================================================
* Unaudited
# Derived from the Consolidated Balance Sheets included in the 2000 Annual Report on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.
</Table>
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 2001
<Page>
<Table>
<Caption>
Consolidated Statements of Income
First Citizens BancShares, Inc. and Subsidiaries
Three Months Ended September 30 Nine Months Ended September 30
(thousands, except per share data; unaudited) 2001 2000 2001 2000
Interest income
Loans $138,711 $150,083 $434,837 $431,376
Investment securities:
U. S. Government 28,958 24,953 86,379 69,192
State, county and municipal 64 60 200 163
Other 1,187 118 1,820 373
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities interest income 30,209 25,131 88,399 69,728
Overnight investments 7,789 7,752 25,159 17,738
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 176,709 182,966 548,395 518,842
Interest expense
Deposits 76,630 79,944 244,528 214,414
Short-term borrowings 4,618 8,397 18,289 22,184
Long-term obligations 3,234 3,168 9,580 9,476
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 84,482 91,509 272,397 246,074
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 92,227 91,457 275,998 272,768
Provision for loan losses 5,620 4,197 16,690 10,631
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 86,607 87,260 259,308 262,137
Noninterest income
Service charges on deposit accounts 17,818 14,898 51,162 43,674
Credit card income 11,518 9,990 31,361 26,915
Trust income 3,848 3,660 11,588 11,062
Fees from processing services 4,483 3,683 12,784 10,635
Commission income 4,955 5,538 14,797 13,587
ATM income 2,920 2,824 8,545 8,143
Gain on sale of mortgage servicing rights - 20,187 - 20,187
Mortgage income 2,937 704 8,813 3,704
Other service charges and fees 3,302 2,874 10,117 9,112
Securities gains 150 1,776 7,188 2,268
Other 1,158 1,224 4,186 3,519
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 53,089 67,358 160,541 152,806
Noninterest expense
Salaries and wages 46,372 43,485 134,547 126,106
Employee benefits 9,162 7,880 27,178 24,957
Occupancy expense 9,119 9,246 26,780 25,628
Equipment expense 10,379 9,730 30,403 28,189
Other 31,931 30,916 96,777 90,617
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 106,963 101,257 315,685 295,497
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 32,733 53,361 104,164 119,446
Income taxes 11,977 20,006 38,545 45,123
==============================================================================================================================
Net income $20,756 $33,355 $65,619 $74,323
==============================================================================================================================
Other comprehensive income (loss), net of taxes
Unrealized securities gains (losses) arising during period $337 $795 $1,867 $43
Less: reclassification adjustment for gains included in net income 95 1,110 1,520 1,124
- ------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of taxes 242 (315) 347 (1,081)
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $20,998 $33,040 $65,966 $73,242
==============================================================================================================================
Average shares outstanding 10,508,330 10,534,049 10,513,488 10,559,305
- ------------------------------------------------------------------------------------------------------------------------------
Per Share
Net income $1.98 $3.17 $6.24 $7.04
Cash dividends 0.25 0.25 0.75 0.75
==============================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</Table>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2001
<Page>
<Table>
<Caption>
Consolidated Statements of Changes in Shareholders' Equity
First Citizens BancShares, Inc. and Subsidiaries
Accumulated
Class A Class B Other
Common Common Retained Comprehensive Total
(thousands, except share data, unaudited) Stock Stock Surplus Earnings Income Equity
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $8,890 $1,720 $143,766 $567,801 $6,580 $728,757
Redemption of 76,585 shares of Class A
common stock (77) (4,652) (4,729)
Net income 74,323 74,323
Unrealized securities losses, net of taxes (1,081) (1,081)
Cash dividends (7,929) (7,929)
========================================================================================================================
Balance at September 30, 2000 $8,813 1,720 $143,766 $629,543 $5,499 $789,341
========================================================================================================================
Balance at December 31, 2000 $8,813 1,709 $143,766 $650,148 $6,292 $810,728
Redemption of 16,300 shares of Class A
common stock (16) (1,408) (1,424)
Redemption of 15,833 shares of Class B
common stock (15) (1,408) (1,423)
Net income 65,619 65,619
Unrealized securities losses, net of taxes 347 347
Cash dividends (7,884) (7,884)
========================================================================================================================
Balance at September 30, 2001 $8,797 1,694 $143,766 $705,067 $6,639 $865,963
========================================================================================================================
See accompanying Notes to Consolidated Financial Statements
</Table>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2001
<Page>
<Table>
<Caption>
Consolidated Statements of Cash Flows
First Citizens BancShares, Inc. and Subsidiaries
Nine months ended September 30
2001 2000
- ------------------------------------------------------------------------------------------------------------------------
(thousands, unaudited)
OPERATING ACTIVITIES
Net income $65,619 $74,323
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization of intangibles 8,682 8,706
Provision for loan losses 16,690 10,631
Deferred tax expense (benefit) 2,183 (1,296)
Change in current taxes payable 16,837 9,006
Depreciation 25,152 22,566
Change in accrued interest payable (4,128) 14,011
Change in income earned not collected (2,167) (7,087)
Securities gains (7,188) (2,268)
Gain on sale of mortgage servicing rights - (20,187)
Provision for branches to be closed 895 2,681
Origination of loans held for sale (257,492) (109,578)
Proceeds from sale of loans held for sale 456,370 103,631
Loss (gain) on loans held for sale (1,858) 225
Net amortization of premiums 3,498 72
Net change in other assets (16,031) (2,172)
Net change in other liabilities 15,046 (150)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 322,108 $103,114
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans outstanding (210,482) (348,768)
Purchases of investment securities held to maturity (945,543) (1,088,398)
Purchases of investment securities available for sale (11,295) (20,352)
Maturities of investment securities held to maturity 289,493 747,906
Sales and maturities of investment secruities available for sale 6,924 2,337
Proceeds from sale of mortgage servicing rights - 26,513
Net change in overnight investments (194,194) 22,947
Dispositions of premises and equipment 4,800 2,971
Additions to premises and equipment (62,439) (55,385)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,122,736) (710,229)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in time deposits 305,869 504,242
Net change in demand and other interest-bearing deposits 367,489 (9,198)
Net change in short-term borrowings 43,143 63,021
Originations of long-term obligations 30,522 -
Repurchases of common stock (2,847) (4,729)
Cash dividends paid (7,884) (7,929)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 736,292 545,407
- ------------------------------------------------------------------------------------------------------------------------
Change in cash and due from banks (64,336) (61,708)
Cash and due from banks at beginning of period 755,930 591,605
- ------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $691,594 $ 529,897
========================================================================================================================
CASH PAYMENTS FOR:
Interest $276,525 $ 232,063
Income taxes 40,248 36,597
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains (losses) 6,924 (1,735)
Reclassification of loans to available for sale 177,817 -
- ------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</Table>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2001
Notes to Consolidated Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
Note A
Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
statements.
In the opinion of management, the consolidated statements contain all
material adjustments necessary to present fairly the financial position of First
Citizens BancShares, Inc. as of and for each of the periods presented, and all
such adjustments are of a normal recurring nature. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results could differ
from those estimates.
These financial statements should be read in conjunction with the financial
statements and notes included in the 2000 First Citizens BancShares, Inc. Annual
Report, which is incorporated by reference on Form 10-K. Certain amounts for
prior periods have been reclassified to conform with statement presentations for
2001. However, the reclassifications have no effect on shareholders' equity or
net income as previously reported.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("Statement 133"), which establishes accounting and
reporting standards for derivative instruments and for hedging activities.
BancShares adopted the provisions of Statement 133 on January 1, 2001, but, as a
result of BancShares' limited use of derivative instruments, the adoption of
Statement 133 did not have a material impact on its consolidated financial
statements.
Note B
Subsequent Event
On October 10, 2001, BancShares issued $100 million in trust preferred
capital securities through its subsidiary FCB/NC Capital Trust II. The
securities earn interest at an annual rate of 8.40 percent and mature on October
31, 2031. For regulatory capital purposes, the securities qualify as Tier 1
capital.
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2001
<Page>
<Table>
<Caption>
Financial Summary
Table 1
2001 2000 Nine Months Ended
(thousands, except per share data Third Second First Fourth Third September 30
and ratios) Quarter Quarter Quarter Quarter Quarter 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
C> C>
Summary of Operations
Interest income $176,709 $182,660 $189,026 $189,328 $182,966 $548,395 $518,842
Interest expense 84,482 91,472 96,443 96,754 91,509 272,397 246,074
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 92,227 91,188 92,583 92,574 91,457 275,998 272,768
Provision for loan losses 5,620 5,394 5,676 4,857 4,197 16,690 10,631
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 86,607 85,794 86,907 87,717 87,260 259,308 262,137
Noninterest income 53,089 54,641 52,811 49,384 67,358 160,541 152,806
Noninterest expense 106,963 105,922 102,800 99,287 101,257 315,685 295,497
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 32,733 34,513 36,918 37,814 53,361 104,164 119,446
Income taxes 11,977 12,509 14,059 13,826 20,006 38,545 45,123
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $20,756 $22,004 $22,859 $23,988 $33,355 $65,619 $74,323
====================================================================================================================================
Net interest income-taxable equivalent $92,698 $91,678 $93,091 $93,240 $92,162 $277,468 $274,950
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Averages
Total assets $11,333,123 $11,128,229 $10,785,178 $10,420,204 $10,167,665 $11,083,960 $9,866,386
Investment securities 2,195,064 2,042,987 1,854,401 1,747,536 1,633,653 2,032,072 1,575,286
Loans 7,054,247 7,139,623 7,101,238 7,077,991 7,036,622 7,098,197 6,914,735
Interest-earning assets 10,126,568 9,952,752 9,616,497 9,365,530 9,142,585 9,900,481 8,867,141
Deposits 9,496,699 9,337,298 9,037,155 8,693,634 8,524,930 9,291,841 8,289,283
Interest-bearing liabilities 8,851,916 8,721,873 8,470,303 8,126,969 7,886,410 8,683,102 7,654,004
Long-term obligations 161,587 154,831 154,639 154,609 154,979 157,044 154,642
Shareholders' equity $857,417 $838,806 $819,289 $799,234 $770,418 $838,262 $751,643
Shares outstanding 10,508,330 10,511,028 10,521,253 10,528,679 10,534,049 10,513,488 10,559,305
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Period-End Balances
Total assets $11,522,525 $11,289,166 $11,145,917 $10,691,617 $10,361,296 $11,522,525 $10,361,296
Investment securities 2,482,123 1,987,085 1,868,886 1,816,720 1,730,439 2,482,123 1,730,439
Loans 7,109,584 7,058,070 7,124,535 7,109,692 7,097,773 7,109,584 7,097,773
Interest-earning assets 10,217,283 9,981,549 9,870,346 9,357,794 9,278,658 10,217,283 9,278,668
Deposits 9,645,226 9,480,108 9,365,356 8,971,868 8,668,642 9,645,226 8,668,642
Interest-bearing liabilities 9,007,989 8,807,409 8,730,946 8,384,692 8,068,241 9,007,989 8,068,241
Long-term obligations 184,018 154,829 154,836 154,332 154,687 184,018 154,687
Shareholders' equity $865,963 $849,297 $830,135 $810,728 $789,341 $865,963 $789,341
Shares outstanding 10,490,703 10,509,956 10,513,475 10,522,836 10,533,814 10,490,703 10,533,814
- ------------------------------------------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Rate of return (annualized) on:
Total assets 0.74% 0.79% 0.86% 0.92% 1.31% 0.79% 1.01%
Shareholders' equity 9.82 10.52 11.32 11.94 17.22 10.47 13.21
Dividend payout ratio 12.63 11.96 11.52 10.96 7.89 12.02 10.65
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits 74.28% 76.46% 78.58% 81.42% 82.54% 76.39% 83.42%
Shareholders' equity to total assets 7.57 7.54 7.60 7.67 7.58 7.56 7.62
Time certificates of $100,000 or more
to total deposits 11.92 11.37 10.60 9.92 9.54 11.28 9.29
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share of Stock
Net income $1.98 $2.09 $2.17 $2.28 $3.17 $6.24 $7.04
Cash dividends 0.25 0.25 0.25 0.25 0.25 0.75 0.75
Book value at period end 82.55 80.81 78.96 77.04 74.93 82.55 74.93
Tangible book value at period end 71.64 69.65 67.52 65.76 64.77 71.64 64.77
- ------------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2001
<Page>
<Table>
<Caption>
Outstanding Loans by Type
Table 2
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Third Second First Fourth Third
(thousands) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
Real estate:
Construction and land development $638,927 $638,751 $237,354 $216,439 $209,592
Mortgage:
1-4 family residential 1,338,655 1,384,449 1,596,920 1,550,329 1,515,694
Commercial 1,798,157 1,702,115 1,997,798 1,993,067 1,980,802
Equity Line 970,295 913,759 862,231 851,810 838,198
Other 169,948 177,787 186,740 186,247 201,107
- -----------------------------------------------------------------------------------------------------------------------------
Total real estate 4,915,982 4,816,861 4,881,043 4,797,892 4,745,393
Commercial and industrial 931,850 948,098 943,722 933,515 942,507
Consumer 1,096,775 1,132,118 1,140,407 1,218,134 1,248,793
Lease financing 142,305 136,806 134,352 134,483 134,655
Other 22,672 24,187 25,011 25,668 26,425
- -----------------------------------------------------------------------------------------------------------------------------
Total loans 7,109,584 7,058,070 7,124,535 7,109,692 7,097,773
Less reserve for loan losses 105,775 105,025 103,825 102,655 101,565
- -----------------------------------------------------------------------------------------------------------------------------
Net loans $7,003,809 $ 6,953,045 $ 7,020,710 $ 7,007,037 $ 6,996,208
- -----------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2001
<Page>
<Table>
<Caption>
Investment Securities
Table 3
September 30, 2001 September 30, 2000
- --------------------------------------------------------------------------------------------------------------------------------
Average Taxable Average Taxable
Book Fair Maturity Equivalent Book Fair Maturity Equivalent
(thousands) Value Value (Yrs./Mos.) Yield Value Value (Yrs./Mos.) Yield
- --------------------------------------------------------------------------------------------------------------------------------
U. S. Government:
Within one year $2,048,934 $2,076,706 0/7 5.11 % $1,363,229 $1,353,193 0/6 6.22 %
One to five years 371,974 376,703 1/5 3.74 317,202 317,700 1/6 6.91
Five to ten years 179 188 7/10 8.03 222 224 8/8 8.04
Over ten years 6,027 6,234 25/3 7.40 8,336 8,279 26/3 7.37
- --------------------------------------------------------------------------------------------------------------------------------
Total 2,427,114 2,459,831 0/8 4.90 1,688,989 1,679,396 0/8 6.35
State, county and municipal:
Within one year 753 761 0/8 6.20 1,150 1,154 0/4 7.20
One to five years 1,002 1,036 2/5 6.67 1,759 1,774 2/8 7.42
Five to ten years 143 151 7/7 5.88
Over ten years 1,411 1,534 15/1 5.47 1,538 1,588 17/6 8.58
- --------------------------------------------------------------------------------------------------------------------------------
Total 3,309 3,482 10/4 6.00 4,447 4,516 7/3 7.76
Other
Within one year 35 35 0/4 6.02 10 10 0/4 5.88
One to five years 10 10 1/4 6.50 45 45 1/7 6.64
Five to ten years 250 250 6/10 7.75 250 250 8/1 4.50
- --------------------------------------------------------------------------------------------------------------------------------
Total 295 295 4/6 7.13 305 305 5/1 5.11
- --------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 2,430,718 2,463,608 0/9 4.90 % 1,693,741 1,684,217 0/10 6.36 %
Marketable equity securities 41,697 51,405 - - 24,500 36,698 - -
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities $2,472,415 $2,515,013 - - $1,718,241 $1,720,915 - -
- --------------------------------------------------------------------------------------------------------------------------------
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2001
<Page>
<Table>
<Caption>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Third Quarter
Table 4
2001 2000 Increase (decrease) due to:
Interest Interest
Average Income Yield Average Income Yield Yield
(thousands) Balance Expense /Rate Balance Expense /Rate Volume /Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Total loans $7,054,247 $139,146 7.83 % $7,036,622 $150,752 8.52 % $488 ($12,094) ($11,606)
Investment securities:
U. S. Government 2,149,139 28,958 5.35 1,600,409 24,953 6.20 7,988 (3,983) 4,005
State, county and municipal 4,675 100 8.49 4,461 96 8.56 5 (1) 4
Other 41,250 1,187 11.42 28,783 118 1.63 206 863 1,069
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,195,064 30,245 5.47 1,633,653 25,167 6.13 8,199 (3,121) 5,078
Overnight investments 877,257 7,789 3.52 472,310 7,752 6.53 5,129 (5,092) 37
====================================================================================================================================
Total interest-earning assets $10,126,568 $177,180 6.95 % $9,142,585 $183,671 7.99 % $13,816 ($20,307) ($6,491)
====================================================================================================================================
Liabilities
Deposits:
Checking With Interest $1,145,737 $1,348 0.47 % $1,051,003 $1,555 0.59 % $125 ($332) ($207)
Savings 610,378 1,611 1.05 628,857 2,363 1.49 (63) (689) (752)
Money market accounts 1,757,093 13,088 2.96 1,455,076 16,487 4.51 2,847 (6,246) (3,399)
Time deposits 4,506,419 60,583 5.33 4,012,339 59,539 5.90 7,060 (6,016) 1,044
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,019,627 76,630 3.79 7,147,275 79,944 4.45 9,969 (13,283) (3,314)
Federal funds purchased 58,941 505 3.40 38,365 645 6.69 262 (402) (140)
Repurchase agreements 226,348 1,224 2.15 181,891 2,360 5.16 408 (1,544) (1,136)
Master notes 336,660 2,398 2.83 308,841 4,448 5.73 301 (2,351) (2,050)
Other short-term borrowings 48,753 491 4.00 55,059 944 6.82 (85) (368) (453)
Long-term obligations 161,587 3,234 7.94 154,979 3,168 8.13 138 (72) 66
====================================================================================================================================
Total interest-bearing liabilities $8,851,916 $84,482 3.79 % $7,886,410 $91,509 4.62 % $10,993 ($18,020) ($7,027)
====================================================================================================================================
Interest rate spread 3.16 % 3.37 %
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $92,698 3.64 % $92,162 4.01 % $2,823 ($2,287) $536
- ------------------------------------------------------------------------------------------------------------------------------------
Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income
taxes only, or state income taxes only, are stated on a taxable-equivalent
basis assuming a statutory federal income tax rate of 35% and state income
tax rate of 7.00% for each period. The taxable-equivalent adjustment was
$471 for 2001 and $705 for 2000.
</Table>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2001
<Page>
<Table>
<Caption>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Nine Months Table 5
2001 2000 Increase (decrease) due to:
- --------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
(thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Total loans $7,098,196 $436,191 8.21 % $6,914,735 $433,463 8.37 % $11,244 ($8,516) $2,728
Investment securities:
U. S. Government 1,985,650 86,379 5.82 1,549,675 69,192 5.96 19,122 (1,935) 17,187
State, county and municipal 4,892 316 8.64 4,057 258 8.49 53 5 58
Other 41,531 1,820 5.86 21,554 373 2.31 610 837 1,447
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,032,073 88,515 5.82 1,575,286 69,823 5.92 19,785 (1,093) 18,692
Overnight investments 770,212 25,159 4.37 377,120 17,738 6.28 15,636 (8,215) 7,421
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $9,900,481 $549,865 7.42 % $8,867,141 $521,024 7.85 % $46,665 ($17,824)$28,841
================================================================================================================================
Liabilities
Deposits:
Checking with Interest $1,129,054 $4,966 0.59 % $1,063,527 $4,669 0.59 % $293 $4 $297
Savings 608,646 5,429 1.19 642,781 7,392 1.54 (337) (1,626) (1,963)
Money market accounts 1,693,769 44,694 3.53 1,463,926 46,039 4.20 6,606 (7,951) (1,345)
Time deposits 4,434,486 189,439 5.71 3,770,027 156,314 5.54 27,932 5,193 33,125
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,865,955 244,528 4.16 6,940,261 214,414 4.13 34,494 (4,380) 30,114
Federal funds purchased 68,075 2,259 4.44 36,113 1,674 6.19 1,269 (684) 585
Repurchase agreements 210,970 4,808 3.05 163,181 5,923 4.85 1,408 (2,523) (1,115)
Master notes 329,139 9,295 3.78 303,394 11,859 5.22 854 (3,418) (2,564)
Other short-term borrowings 51,919 1,927 4.96 56,413 2,728 6.46 (193) (608) (801)
Long-term obligations 157,044 9,580 8.16 154,642 9,476 8.19 143 (39) 104
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $8,683,102 $272,397 4.19 % $7,654,004 $246,074 4.29 % $37,975 ($11,652)$26,323
================================================================================================================================
Interest rate spread 3.23 % 3.56 %
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $277,468 3.75 % $274,950 4.14 % $8,690 ($6,172) $2,518
- --------------------------------------------------------------------------------------------------------------------------------
Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income
taxes only, or state income taxes only, are stated on a taxable-equivalent
basis assuming a statutory federal income tax rate of 35% and state income
tax rate of 7.00% for each period. The taxable-equivalent adjustment was
$1,470 for 2001 and $2,182 for 2000.
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2001
<Table>
<Caption>
Summary of Loan Loss Experience and Risk Elements
Table 6
2001 2000
----------------------------------------- ---------------------------- Nine Months Ended
Third Second First Fourth Third September 30
(thousands, except ratios) Quarter Quarter Quarter Quarter Quarter 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Reserve balance at beginning of period $105,025 $ 103,825 $ 102,655 $ 101,565 $ 100,515 $102,655 $98,690
Adjustment for sale of loans (777) - - - (777)
Provision for loan losses 5,620 5,394 5,676 4,857 4,197 16,690 10,631
Net charge-offs:
Charge-offs (5,462) (4,386) (5,273) (5,232) (3,989 (15,121) (10,674)
Recoveries 592 969 767 1,465 842 2,328 2,918
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (4,870) (3,417) (4,506) (3,767) (3,147) (12,793) (7,756)
===================================================================================================================================
Reserve balance at end of period $105,775 $ 105,025 $ 103,825 $ 102,655 $ 101,565 $105,775 $101,565
===================================================================================================================================
Historical Statistics
Balances
Average total loans $7,054,247 $ 7,139,623 $7,101,238 $7,077,991 $ 7,036,622 $7,098,196 $6,914,735
Total loans at period-end 7,109,584 7,058,069 7,124,535 7,109,692 7,097,773 7,109,584 7,097,773
- -----------------------------------------------------------------------------------------------------------------------------------
Risk Elements
Nonaccrual loans $13,349 $ 12,658 $ 12,830 $ 15,933 $ 13,918 $13,349 $13,918
Other real estate acquired through
foreclosure 4,242 2,798 3,082 1,880 2,079 4,242 2,079
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $17,591 $ 15,456 $ 15,912 $ 17,813 $ 15,997 $17,591 $15,997
- -----------------------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days or more past due $14,993 $ 10,371 $ 6,413 $ 6,731 $ 6,866 $14,993 $6,866
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios
Net charge-offs (annualized) to average
total loans 0.27% 0.19% 0.26% 0.21% 0.18% 0.24% 0.15%
Reserve for loan losses to total loans
at period-end 1.49 1.49 1.46 1.44 1.43 1.49 1.43
Nonperforming assets to total loans plus
foreclosed real estate at period-end 0.25 0.22 0.22 0.25 0.23 0.25 0.23
- -----------------------------------------------------------------------------------------------------------------------------------
</Table>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 2001
INTRODUCTION
Management's discussion and analysis of earnings and related financial data
are presented to assist in understanding the financial condition and results of
operations of First Citizens BancShares, Inc. and Subsidiaries ("BancShares").
This discussion and analysis should be read in conjunction with the unaudited
Consolidated Financial Statements and related notes presented within this
report. The focus of this discussion concerns BancShares' two banking
subsidiaries. First-Citizens Bank & Trust Company ("FCB") operates branches in
North Carolina, West Virginia, and Virginia. Atlantic States Bank ("ASB")
operates offices in Georgia and Florida.
SUMMARY
BancShares realized a decrease in earnings during the third quarter of 2001
compared to the third quarter of 2000. Consolidated net income during the third
quarter of 2001 was $20.8 million, compared to $33.4 million earned during the
corresponding period of 2000, a reduction of $12.6 million or 37.8 percent. Net
income per share during the third quarter of 2001 totaled $1.98, compared to
$3.17 during the third quarter of 2000.
Much of the decrease in earnings can be attributed to the nonrecurring gain
recognized on the sale of mortgage servicing rights and higher securities gains
recorded during the third quarter of 2000. The sale of mortgage servicing rights
and the securities transactions contributed after-tax gains of $13.7 million
during the third quarter of 2000. Ignoring the impact of the non-recurring items
during both periods, net income for the third quarter of 2001 would have been
$20.7 million, compared to $19.6 million during 2000, an increase of 5.3
percent.
Return on average assets was 0.74 percent for the third quarter of 2001
compared to 1.31 percent during the same period of 2000. Return on average
equity was 9.82 percent for the third quarter of 2001 compared to 17.22 percent
for the same quarter of 2000. Adjusting for the impact of the nonrecurring
items, net income per share was $1.97 during the third quarter of 2001, compared
to $1.86 per share during the same period of 2000. The adjusted annualized
return on average assets was 0.72 percent for the third quarter of 2001,
compared to 0.77 percent for the third quarter of 2000. The adjusted return on
average shareholders' equity was 9.56 percent for the third quarter of 2001,
compared to 10.11 percent for the same period of 2000.
For the first nine months of 2001, BancShares recorded net income of $65.6
million, compared to $74.3 million earned during the first nine months of 2000,
a reduction of $8.7 million or 11.7 percent. Net income per share for the first
nine months of 2001 was $6.24, compared to $7.04 during the same period of 2000.
BancShares returned 0.79 percent on average assets during the first nine months
of 2001 compared to 1.01 percent during the corresponding period of 2000. The
return on average equity for 2001 was 10.47 percent, compared to 13.21 percent
for the same period in 2000. The reduction in year-to-date net income was the
result of higher noninterest expense and provision for loan losses, partially
offset by higher noninterest income and net interest income.
For the nine-month period ended September 30, 2001, gains on securities
transactions contributed $4.5 million after tax to net income. In addition to
the $12.6 million after tax gain from the sale of mortgage servicing rights
recorded during 2000, securities transactions during the first nine months of
2000 contributed $1.4 million after tax to net income. Adjusting for the impact
of all nonrecurring gains, net income would have been $61.1 million during 2001
and $60.3 million during 2000, a 1.3 percent increase in 2001. Adjusted net
income per share would have been $5.81 for 2001 and $5.71 for 2000. The adjusted
annualized return on average assets and average equity would have been 0.74
percent for the nine months ended September 30, 2001, compared to 0.82 percent
for the same period of 2000. Adjusting for nonrecurring items, the return on
average equity would have been 9.70 percent and 10.72 percent, respectively, for
the nine months ended September 30, 2001 and 2000.
Various profitability, liquidity and capital ratios are presented in Table
1. To understand the changes and trends in interest-earning assets and
interest-bearing liabilities, refer to the average balance sheets presented in
Table 4 for the third quarter and Table 5 for the first nine months of 2001 and
2000.
INTEREST-EARNING ASSETS
Interest-earning assets for the third quarter of 2001 averaged $10.13
billion, an increase of $984.0 million or 10.8 percent from the third quarter of
2000. For the nine months ended September 30, 2001, earning assets averaged
$9.90 billion, an increase of $1.03 billion or 11.7 percent over the same period
of 2000. These increases result primarily from growth in the investment
securities portfolio and overnight investments.
Loans. At September 30, 2001 and 2000, gross loans totaled $7.11 billion
and $7.10 billion, respectively. As of December 31, 2000, gross loans were $7.11
billion. Loan growth among business loans essentially offset the impact of the
sale of $177.9 million in residential mortgage loans during the second quarter
of 2001. Loans secured by real estate totaled $4.92 billion at September 30,
2001, compared to $4.75 billion at September 30, 2000, an increase of $170.6
million or 3.6 percent. This growth results primarily from strong growth among
business lending and retail EquityLine lending. Consumer loans were $1.10
billion at September 30, 2001, a $152.0 million or 12.2 percent reduction from
the $4.75 billion outstanding at September 30, 2000. The reduction among
consumer loans has primarily resulted from lower sales finance loan activity
during late 2000 and early 2001. Table 2 details outstanding loans by type for
the past five quarters.
During the third quarter of 2001, loans averaged $7.05 billion, an increase
of $17.6 million or 0.3 percent from the comparable period of 2000. Loan growth
during 2001 has suffered due to current economic conditions. For the
year-to-date, loans have averaged $7.10 billion for 2001 compared to $6.91
billion for the same period of 2000. This $183.5 million or 2.7 percent increase
is due to growth among business and retail real estate lending.
Despite the recent downward pressure on interest rates, management
anticipates diminished customer demand for business loan products due to the
economic uncertainty confronting many customers. Management projects continued
reductions in retail installment loans, and growth prospects among business
customers appear uncertain. All growth projections, however, are subject to
change as a result of further economic deterioration or improvement.
Investment securities. At September 30, 2001 and 2000, the investment
portfolio totaled $2.48 billion and $1.73 billion, respectively. At December 31,
2000, the investment portfolio was $1.82 billion. The $751.7 million growth in
the securities portfolio since September 30, 2000 results from deposit growth,
which has significantly outpaced the growth in loan demand. The additional
liquidity generated by deposit growth has been invested in the securities
portfolio. Average investment securities increased by $561.4 million or 34.4
percent from the third quarter ended in 2000 to the third quarter ended in 2001,
the result of strong deposit growth. All securities that are classified as
held-to-maturity reflect BancShares' ability and positive intent to hold those
investments until maturity. Marketable equity securities are classified as
available-for-sale and are reported at their aggregate fair value. Table 3
presents detailed information relating to the investment securities portfolio.
Income on Interest-Earning Assets. Interest income amounted to $176.7
million during the third quarter of 2001, a 3.4 percent decrease from the third
quarter of 2000. The unfavorable impact of lower asset yields more than offset
the benefit resulting from growth among interest-earning assets, causing the
reduction in interest income in the third quarter of 2001 when compared to the
same period of 2000.
The taxable-equivalent yield on interest-earning assets for the third
quarter of 2001 was 6.95 percent, compared to 7.99 percent for the corresponding
period of 2000. The lower yield on earning assets during 2001 results primarily
from a decrease in the taxable-equivalent loan yield, the result of decreased
market rates. Additionally, substantially all of the growth among
interest-earning assets has been among the lower-yielding assets - investment
securities and overnight investments. Investment securities and overnight
investments represented 30.3 percent of average interest-earning assets during
the third quarter of 2001, compared to 23.0 percent during the same period of
2000.
Loan interest income for the third quarter of 2001 was $138.7 million, a
decrease of $11.4 million or 7.6 percent from the third quarter of 2000, due to
decreased yields. The taxable-equivalent yield on the loan portfolio was 7.83
percent during the third quarter of 2001, compared to 8.52 percent during the
same period of 2000, the decrease resulting from lower market rates.
For the nine months ended September 30, 2001, loan interest income was
$434.8 million, an increase of $3.5 million or 0.8 percent over the same period
of 2000. The modest increase in interest income during the nine-month period
reflects the sluggish growth in the loan portfolio, the impact of which was
largely offset by lower asset yields.
Income earned on the investment securities portfolio amounted to $30.2
million during the third quarter of 2001 and $25.1 million during the same
period of 2000, an increase of $5.1 million or 20.2 percent. This increase is
the result of a $561.4 million or 34.4 percent increase in the average
securities portfolio. The investment securities portfolio taxable-equivalent
yield fell to 5.47 percent for the quarter ended September 30, 2001, compared to
6.13 percent for the quarter ended September 30, 2000, the lower yields
reflecting general market conditions.
For the nine months ended September 30, 2001, interest income from
investment securities was $88.4 million, compared to $69.7 million during the
same period of 2000, an increase of $18.7 million or 26.8 percent. The higher
income is the result of a 29.0 percent increase in the average securities
portfolio. The yield on average investment securities dropped from 5.92 percent
for the nine month period ended September 30, 2000 to 5.82 for the same period
of 2001. As existing securities continue to mature, given the low level of
current loan demand, management expects that substantially all of the proceeds
will be reinvested in the investment securities portfolio. Based on current
market conditions, management believes this will result in continued reductions
in the portfolio's taxable-equivalent yield.
INTEREST-BEARING LIABILITIES
At September 30, 2001 and 2000, interest-bearing liabilities totaled $9.01
billion and $8.07 billion, respectively, compared to $8.38 billion as of
December 31, 2000. During the third quarter of 2001, interest-bearing
liabilities averaged $8.85 billion, an increase of $965.5 million or 12.2
percent from the third quarter of 2000. Total interest-bearing liabilities
averaged $8.68 billion during the first nine months of 2001, compared to $7.65
billion during the same period of 2000, an increase of $1.03 billion or 13.4
percent. Growth in the third quarter and the year-to-date both result from
strong growth among interest-bearing deposits.
Deposits. At September 30, 2001, total deposits were $9.65 billion, an
increase of $976.6 million or 11.3 percent over September 30, 2000. Compared to
the December 31, 2000 balance of $8.97 billion, total deposits have increased
$673.4 million or 7.5 percent.
Average interest-bearing deposits were $8.02 billion during the third
quarter of 2001 compared to $7.15 billion during the third quarter of 2000, an
increase of $872.4 million or 12.2 percent. During the third quarter of 2001,
average time deposits increased $494.1 million or 12.3 percent. Average money
market accounts increased $302.0 million, an increase of 20.8 percent. Average
interest-bearing liabilities increased $1.03 billion from $7.65 billion during
the first nine months of 2000 to $8.68 billion during the first nine months of
2001. The 13.4 percent increase in average interest-bearing liabilities included
a $664.5 million or 17.6 percent increase in average time deposits. Further
growth resulted from higher average money market accounts, which increased
$229.8 million or 15.7 percent. Although some of the growth in deposits during
the third quarter relates to seasonal factors, management attributes much of the
growth during 2001 to continuing volatility in equity markets, which has caused
many investors to seek the safety of traditional bank deposits.
Short-term Borrowings. At September 30, 2001, short-term borrowings totaled
$676.4 million compared to $632.4 million at December 31, 2000 and $632.3
million at September 30, 2000. For the quarters ended September 30, 2001 and
2000, short-term borrowings averaged $670.7 million and $584.2 million,
respectively. This $86.5 million or 14.8 percent increase resulted primarily
from growth among overnight repurchase agreements and master notes.
Long-term Obligations. At September 30, 2001, long-term obligations totaled
$184.0 million, an increase of $29.3 million or 19.0 percent over September 30,
2000. The increase results from $30 million in debt incurred by ASB during the
third quarter. As a result of favorable borrowing conditions and a need for
long-term borrowings for more effective interest rate management, ASB entered
into a 10-year and 20-year borrowing arrangement during the third quarter.
During the third quarter of 2001, long-term obligations averaged $161.6 million,
compared to $155.0 million during the same period of 2000. For the nine-month
period ended September 30, long-term borrowings averaged $157.0 million in 2001
and $154.6 million in 2000.
On October 10, 2001, BancShares issued $100 million in trust preferred
capital securities. These 30-year borrowings were issued at a rate of 8.40
percent. These securities qualify for Tier 1 capital for regulatory purposes,
and management expects that the proceeds from these long-term obligations will
be used to support future expansion at FCB and ASB.
Expense on Interest-Bearing Liabilities. BancShares' interest expense
amounted to $84.5 million during the third quarter of 2001, a $7.0 million or
7.7 percent reduction from the third quarter of 2000. The lower interest expense
was the result of lower market rates, partially offset by higher average volume.
The average rate on these liabilities decreased 83 basis points from the 4.62
percent during the third quarter of 2000 compared to 3.79 percent during the
same period of 2001. For the third quarter, the rate on average money market
accounts decreased 155 basis points from 4.51 percent during the third quarter
of 2000 to 2.96 percent during the third quarter of 2001, while the average rate
on time deposits decreased 57 basis points from 5.90 percent during the third
quarter of 2000 to 5.33 percent during the third quarter of 2001.
Many of BancShares' non-deposit funding sources are indexed to federal
funds rates. As a result of the significant reductions in federal funds rates
during 2001, the rate on these borrowings has dropped. The rate on average
master notes for the third quarter of 2001 was 2.83 percent, while the rate was
5.73 percent during the same period in 2000. The rate on overnight repurchase
obligations has dropped from 5.16 percent during the third quarter of 2000 to
2.15 percent during the third quarter of 2001.
For the year-to-date, interest expense was $272.4 million, compared to
$246.1 million for the same period of 2000. The $26.3 million or 10.7 percent
increase results from higher average volume, the impact of which was partially
offset by lower interest rates. The rate on all interest-bearing liabilities
fell from 4.29 percent during the first nine months of 2000 to 4.19 percent
during the same period of 2001. The rate on average interest-bearing deposits
increased three basis points to 4.16 percent during 2001, the impact of which
was more than offset by the reduction in the rate on short-term borrowings tied
to federal funds rates.
NET INTEREST INCOME
Net interest income totaled $92.2 million during the third quarter of 2001,
an increase of $770,000 or 0.8 percent from the third quarter of 2000. The
taxable-equivalent net yield on interest-earning assets was 3.64 percent for the
third quarter of 2001, a decrease of 37 basis points from the 4.01 percent
reported for the third quarter of 2000. The taxable equivalent interest rate
spread for the third quarter of 2001 was 3.16 percent compared to 3.37 percent
for the same period of 2000. The lower net yield on interest-earning assets
resulted from the yields on interest-earning assets declining more than the rate
on interest-bearing liabilities.
A principal objective of BancShares' asset/liability management function is
to manage interest rate risk or the exposure to changes in interest rates.
Management maintains portfolios of interest-earning assets and interest-bearing
liabilities with maturities or repricing opportunities that will protect against
wide interest rate fluctuations, thereby limiting, to the extent possible, the
ultimate interest rate exposure. Management is aware of the potential negative
impact that movements in market interest rates may have on net interest income.
Market risk is the potential economic loss resulting from changes in market
prices and interest rates. This risk can either result in diminished current
fair values or reduced net interest income in future periods. Despite the
interest rate volatility during 2001 and the changes in asset composition,
BancShares' portfolios of assets and liabilities that are sensitive to changes
in interest rates have not changed significantly since December 31, 2000.
Therefore, as of September 30, 2001, BancShares' market risk profile has not
changed significantly from December 31, 2000. BancShares continues to experience
a liability-sensitive position which results in lower net interest income during
periods of rising interest rates. However, as a result of asset growth rates at
levels that exceed deposit growth rates, the liability sensitive position as a
percentage of interest-earning assets has narrowed since December 31, 2000.
ASSET QUALITY
Reserve for loan losses. Management continuously analyzes the growth and
risk characteristics of the total loan portfolio under current economic
conditions in order to evaluate the adequacy of the reserve for loan losses.
Such factors as the financial condition of the borrower, fair market value of
collateral and other considerations are recognized in estimating probable credit
losses. Management periodically reviews the assumptions imbedded within the
models used to calculate the loan loss reserve. Business loans are generally
graded, and those credit grades become the basis for the loss estimates based on
historical experience. For all other loans, loss estimates are made by
management based on historical data, current trends and estimated repayment
frequencies.
Based on the model, at September 30, 2001, the reserve for loan losses
amounted to $105.8 million or 1.49 percent of loans outstanding. This compares
to $102.7 million or 1.44 percent of loans outstanding at December 31, 2000, and
$101.6 million or 1.43 percent of loans outstanding at September 30, 2000.
Management considers the established reserve adequate to absorb losses that
relate to loans outstanding at September 30, 2001. While management uses
available information to establish provisions for loan losses, future additions
to the reserve may be necessary based on changes in economic conditions or other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the reserve for loan losses. Such
agencies may require the recognition of adjustments to the reserve based on
their judgments of information available to them at the time of their
examination.
The provision for loan losses charged to operations during the third
quarter of 2001 was $5.6 million, compared to $4.2 million during the third
quarter of 2000. For the nine month periods ended September 30, total provision
for loan losses was $16.7 million for 2001 and $10.6 million for 2000. The $6.1
million increase reflects recognition of probable losses due to the current
economic environment and the resulting increases in nonperforming assets and
delinquencies.
Net charge-offs for the nine month period ended September 30, 2001 totaled
$12.8 million, compared to $7.8 million during the same period of 2000. As a
percentage of average loans outstanding, the losses represent 0.24 percent for
the nine months ended September 30, 2001, compared to 0.15 percent for the same
period of 2000. Gross charge-offs totaled $15.1 million for the nine month
period ended September 30, 2001 and $10.7 million for the nine month period
ended September 30, 2000. Recoveries were $2.3 million and $2.9 million for the
respective periods. The increased levels of charge-offs during 2001 primarily
result from higher business and credit card charge-offs.
Management remains committed to maintaining high levels of credit quality.
Table 6 provides details concerning the reserve and provision for loan losses
over the past five quarters and for the year-to-date for 2001 and 2000.
Nonperforming assets. At September 30, 2001, BancShares' nonperforming
assets amounted to $17.6 million or 0.25 percent of gross loans plus foreclosed
properties, compared to $17.8 million at December 31, 2000, and $16.0 million at
September 30, 2000. Loans past due more than 90 days increased from $6.9 million
at September 30, 2000 to $15.0 million at September 30, 2001, primarily due to
higher past dues among residential mortgage loans. Management continues to
closely monitor nonperforming assets, taking necessary actions to minimize
potential exposure.
NONINTEREST INCOME
During the first nine months of 2001, noninterest income was $160.5
million, compared to $152.8 million during the same period of 2000. The $7.7
million or 5.1 percent increase was due to increases in service charges on
deposit accounts, securities gains and credit card income. Excluding
nonrecurring gains, noninterest income for 2001 would have been $153.4 million,
compared to $130.4 million in 2000, an increase of $23.0 million or 17.6
percent.
During 2001, noninterest income benefited from an additional $7.5 million
in service charges on deposit accounts. This represents a 17.1 percent increase
during the first nine months of 2001 compared to the first nine months of 2000,
the result of higher commercial service charges and bad check fees.
BancShares reported $7.2 million in securities gains during the first nine
months of 2001 compared to $2.3 million during 2001, a $4.9 million or 216.9
percent increase over 2000. These gains resulted from the sale and exchange of
available-for-sale securities. Noninterest income from the credit card operation
contributed an additional $4.4 million during the first nine months of 2001
compared to the same period of 2000. This represents a 16.5 percent increase
over the first nine months of 2000, the result of higher merchant income and
interchange income generated by card usage.
Mortgage noninterest income contributed an additional $5.1 million during
the first nine months of 2001 compared to the same period of 2000. This increase
represents a 137.9 percent increase over the same period of 2000, primarily the
result of gains recognized on the sale of $177.9 million in residential mortgage
loans during the second quarter of 2001.
During 2001, fees from processing services were $12.8 million compared to
$10.6 million during 2000, an increase of $2.1 million or 20.2 percent from the
same period in 2000. This growth resulted from growth in transactions processed
on behalf of client banks.
While the amounts of the variances are different, the reasons for the
changes in components of noninterest income during the three-month periods ended
September 30 are the same as the explanations for the changes in the nine-month
periods ended September 30, except where otherwise noted.
NONINTEREST EXPENSE
Noninterest expense was $315.7 million for the first nine months of 2001, a
6.8 percent increase over the $295.5 million recorded during the same period of
2000. Much of the $20.2 million increase in noninterest expense relates to
higher personnel costs. Salaries and wages increased $8.4 million from $126.1
million for the first nine months of 2000 to $134.5 million for same period in
2001. Employee benefits expense increased $2.2 million or 8.9 percent during the
first nine months of 2001, compared to the corresponding period of 2000 due to
the larger employee population, increased insurance costs and higher pension
expenses.
Equipment expense was $30.4 million and $28.2 million for the first nine
months of 2001 and 2000, respectively. The $2.2 million increase resulted from
higher software depreciation, maintenance contract costs and depreciation on
hardware. Occupancy expense increased $1.2 million or 4.5 percent during the
first nine months of 2001, the result of higher depreciation and utility
expenses. During 2001, occupancy expense benefited from an $807,000 reduction in
the provision for branches to be closed, an accrual established for lease
payments relating to branches that management has elected to close prior to the
lease maturity.
The $6.2 million, or 6.8 percent, increase in other expenses resulted from
higher credit card processing costs, net other charge offs and core deposit
amortization. The increase in other expense during 2001 was partially offset by
a $979,000 reduction in impairment losses recorded for branches to be closed.
While the amounts of the variances are different, the reasons for the
changes in components of noninterest expense during the three-month periods
ended September 30 are the same as the explanations for the changes in the
nine-month periods ended September 30, except where otherwise noted.
INCOME TAXES
Income tax expense amounted to $38.5 million during the first nine months
of 2001, compared to $45.1 million during the same period of 2000, a 14.6
percent decrease resulting from lower pre-tax income. The effective tax rates
for these periods were 37.0 percent and 37.8 percent, respectively.
LIQUIDITY
Management relies on the investment portfolio as a source of liquidity,
with maturities designed to provide needed cash flows. Further, retail deposits
generated throughout the branch network have enabled management to fund asset
growth and maintain liquidity. In the event additional liquidity is needed,
BancShares maintains readily available sources to borrow funds through its
correspondent network.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum
regulatory capital requirements. At September 30, 2001 and 2000, the leverage
capital ratio of BancShares was 7.98 percent and 8.22 percent, respectively,
surpassing the minimum level of 3 percent. As a percentage of risk-adjusted
assets, BancShares' Tier 1 capital ratio was 11.71 percent at September 30,
2001, and 10.35 percent as of September 30, 2000. The minimum ratio allowed is 4
percent of risk-adjusted assets. The total risk-adjusted capital ratio was 13.02
percent at September 30, 2001 and 11.64 percent as of September 30, 2000. The
minimum total capital ratio is 8 percent. BancShares and its subsidiary banks
exceed the capital standards established by their respective regulatory
agencies.
CURRENT ACCOUNTING AND REGULATORY ISSUES
In July 2001, the Financial Accounting Standards Board (FASB) released two
new accounting standards related to business combinations, goodwill and
intangible assets. Statement No.141 "Business Combinations" (Statement 141)
requires that the purchase method of accounting be used for all business
combinations initiated after June 30,2001. Statement No.141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet in order to be recognized and reported apart from
goodwill.
Statement No.142 "Goodwill and Other Intangible Assets" (Statement 142) is
effective on January 1, 2002 and will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. Statement 142 also will require that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values and be reviewed for
impairment in accordance with FASB's Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
connection with Statement 142's transitional goodwill impairment evaluation, an
assessment will be required to determine whether there is an indication that
goodwill is impaired as of the date of adoption. Any transitional impairment
loss will be recognized as the cumulative effect of a change in accounting
principle in our statement of earnings.
Because of the extensive effort needed to comply with adopting Statement
141 and Statement 142 and continuing interpretative guidance, it is not possible
at this time to reasonably estimate the impact of adopting these Statements on
our financial statements, including whether we will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" (Statement 144), which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. Statement 144 provides guidance
on differentiating between long-lived assets to be held and used, long-lived
assets to be disposed of other than by sale and long-lived assets to be disposed
of by sale. Statement 144 supersedes FASB Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". Statement 144 also supersedes Accounting
Principals Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". This statement is
effective for fiscal years beginning after December 15, 2001. At this time,
BancShares is assessing the impact of Statement 144 on its financial condition
and results of operations.
Management is not aware of any current recommendations by regulatory
authorities that, if implemented, would have or would be reasonably likely to
have a material effect on liquidity, capital ratios or results of operations.
FORWARD-LOOKING STATEMENTS
This discussion may contain statements that could be deemed forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act, which statements are
inherently subject to risks and uncertainties. Forward-looking statements are
statements that include projections, predictions, expectations or beliefs about
future events or results or otherwise are not statements of historical fact.
Such statements are often characterized by the use of qualifying words (and
their derivatives) such as "expect," "believe," "estimate," "plan," "project,"
"anticipate," or other statements concerning opinions or judgment of BancShares
and its management about future events. Factors that could influence the
accuracy of such forward-looking statements include, but are not limited to, the
financial success or changing strategies of BancShares' customers, actions of
government regulators, the level of market interest rates, and general economic
conditions. of 2001 compared to 1.01 percent during the corresponding period of
2000. The return on average equity for 2001 was 10.47 percent, compared to 13.21
percent for the same period in 2000. The reduction in year-to-date net income
was the result of higher noninterest expense and provision for loan losses,
partially offset by higher noninterest income and net interest income.
For the nine-month period ended September 30, 2001, gains on securities
transactions contributed $4.5 million after tax to net income. In addition to
the $12.6 million after tax gain from the sale of mortgage servicing rights
recorded during 2000, securities transactions during the first nine months of
2000 contributed $1.4 million after tax to net income. Adjusting for the impact
of all nonrecurring gains, net income would have been $61.1 million during 2001
and $60.3 million during 2000, a 1.3 percent increase in 2001. Adjusted net
income per share would have been $5.81 for 2001 and $5.71 for 2000. The adjusted
annualized return on average assets and average equity would have been 0.74
percent for the nine months ended September 30, 2001, compared to 0.82 percent
for the same period of 2000. Adjusting for nonrecurring items, the return on
average equity would have been 9.70 percent and 10.72 percent, respectively, for
the nine months ended September 30, 2001 and 2000.
Various profitability, liquidity and capital ratios are presented in Table
1. To understand the changes and trends in interest-earning assets and
interest-bearing liabilities, refer to the average balance sheets presented in
Table 4 for the third quarter and Table 5 for the first nine months of 2001 and
2000.